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A train car waits in line at Potash Corp.'s Cory mine near Saskatoon. (DAVID STOBBE/REUTERS)
A train car waits in line at Potash Corp.'s Cory mine near Saskatoon. (DAVID STOBBE/REUTERS)

Potash selloff raises questions about value Add to ...

Despite its very strong third-quarter profits, Potash Corp. share price fell sharply Thursday as investors started exiting the stock on fears that Ottawa will block BHP Billiton's hostile takeover bid.

After announcing a $402.7-million (U.S.) profit, its second-highest third-quarter performance, Potash Corp.'s share price closed down 3.8 per cent at $146 (Canadian). Typically, stronger earnings boost share prices, but investors' concerns about government intervention bubbled to the surface after the premiers of Saskatchewan and Alberta launched a co-ordinated effort to persuade the federal Conservatives to block the bid.

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Before Thursday, investors seemed to dismiss the chance that the government could block BHP's bid, worth $130 (U.S.) a share. The Conservative government has a record of approving almost every takeover bid that has come before Investment Canada. Only Minnesota-based Alliant Techsystems Inc.'s $1.3-billion bid (Canadian) for MacDonald Dettwiler and Associates Ltd. in 2008 was rejected.

Thursday's sharp selloff raises the question: What is Potash's stock worth without a takeover offer? It is a tough question because Australia-based BHP's bid raised the entire potash industry's profile, skewing competitors' valuations.

One analyst who has tried to answer the question is Vincent Andrews, at Morgan Stanley in New York. He recently pegged Potash Corp.'s replacement cost, or the value of its assets without a BHP bid, at $160 (U.S.) and set a target price of $180. To do so, he looked back to Aug. 16, the day before BHP launched its bid, and assessed relevant factors that have come into play since.

For example, corn prices per bushel are up about 35 per cent since the bid was made public. In 2008, food prices skyrocketed when oil prices went up, but this time analysts agree that corn prices are rising because of growing demand. Increased demand spurs the need for fertilizer, of which potash is a key ingredient.

Potash contract prices have also jumped. Economist Patricia Mohr at Bank of Nova Scotia notes that although spot prices hovered around $340 for most of this year, some recent December and January delivery contracts signed by Brazil and Southeast Asian countries have come at prices of more than $400. China's Sinofert Holdings also signed a three-year supply contract with Canpotex that ships a guaranteed minimum volume through 2013, meaning the Chinese expect demand will not fall off as it did during the financial crisis.

Given the general demand for potash, it's unlikely Potash Corp.'s stock would fall too far if shareholders reject BHP's bid, or if it were blocked by the government. If there were no takeover, analysts such as Mr. Andrews are valuing the stock in the $150-to-$160 range. But Mr. Andrews also ran a worst-case scenario in which the BHP bid fails and the industry fundamentals also deteriorate. In that environment, which he noted is unlikely, the stock could fall to $100.

Even if Industry Canada approves the acquisition, BHP's current offer might not be enough. Potash Corp's results on Thursday reinforced the already prevalent market view that BHP will have to sweeten its bid to at least $150 per share - perhaps $160 - to win shareholder approval. Some observers believe the shares could go higher, based on market fundamentals and Potash Corp.'s profit growth.

Editor's note: Economist Patricia Mohr works at Bank of Nova Scotia. An earlier online version of this story and the original newspaper version contained incorrect information.

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